Question

Part A: A project has an initial cost of $60,025, expected net cash inflows of $11,000 per year for 11 years, and a cost of capital of 14%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

Part B: A project has an initial cost of $35,000, expected net cash inflows of $14,000 per year for 10 years, and a cost of capital of 11%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Solution:
Part A:	The project's PI is 1.00
Working Notes:
	Profitability Index = PV of Inflows / PV of outflows
	Year	Cash inflows	PVF @ 14%	Present value
	1	11,000	0.877192982	9649.122807
	2	11,000	0.769467528	8464.142813
	3	11,000	0.674971516	7424.686678
	4	11,000	0.592080277	6512.883051
	5	11,000	0.519368664	5713.055308
	6	11,000	0.455586548	5011.452025
	7	11,000	0.399637323	4396.010548
	8	11,000	0.350559055	3856.149603
	9	11,000	0.307507943	3382.587371
	10	11,000	0.26974381	2967.181905
	11	11,000	0.236617377	2602.791144
			PV of inflows	59980.063254
	Notes: PVF is calculated @ 14% = 1/(1+0.14)^n     where n is the period for which PVF is calculated.
	PV of outflows = Present value of cash out flows and in our case out flows is at initial stage years = zeros
	PV of outflows =Cost of initial = $60,025
	Profitability Index = PV of Inflows / PV of outflows
		=59980.063254/60025
		=0.999251
		=1.00
Part B
	The project's MIRR	20.93%
Working Notes:
	MIRR = (total terminal value / Initial cash outflow)^(1/n)   - 1
	where n is the no. Of periods
	year	Cash Flows	FV factor	Terminal value
	1	14,000	2.558036924	35812.516941
			=(1.11)^(10-1)
	2	14,000	2.30453777	32263.528776
			=(1.11)^(10-2)
	3	14,000	2.076160153	29066.242141
			=(1.11)^(10-3)
	4	14,000	1.870414552	26185.803730
			=(1.11)^(10-4)
	5	14,000	1.685058155	23590.814171
			=(1.11)^(10-5)
	6	14,000	1.51807041	21252.985740
			=(1.11)^(10-6)
	7	14,000	1.367631	19146.834000
			=(1.11)^(10-7)
	8	14,000	1.2321	17249.400000
			=(1.11)^(10-8)
	9	14,000	1.11	15540.000000
			=(1.11)^(10-9)
	10	14,000	1	14000.000000
			=(1.11)^(10-10)
			Terminal Value	234108.125500
	Initial cash outflow	35000 the initial cost
	MIRR = (total terminal value / Initial cash outflow)^(1/n)   - 1
	= (234108.1255/35000)^(1/10) -1
	=1.209302204 -1
	=0.209302204
	=20.93%
Notes:	FV factor is calculated by formula
	= ( 1 + rate of return)^(life-n)
	rate of return = 11%
	where n is the no. Of periods
Please feel free to ask if anything about above solution in comment section of the question.